The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • CIIRP’S MISSING MORATORIUM: A STRUCTURAL FLAW UNDER THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ACT, 2026

    BY KASHVI SHREY, SECOND – YEAR STUDENT AT CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

    I. Introduction

    The Insolvency and Bankruptcy Code, 2016 (‘IBC’or ‘the Code’) has reshaped India’s approach to insolvency, aiming to strike a balance between creditor recovery and fair treatment of debtors and other stakeholders. At its core, the Code is built on the ideas of value maximisation and equitable, efficient, and transparent processes. In practice, though, the numbers tell a grimmer story. Resolution processes take an average of 602 days, which is nearly double the statutory ceiling of 330 days, and creditors recover roughly 33% of admitted claims. Against this backdrop, the Insolvency and Bankruptcy Code (Amendment) Act, 2026 (‘The Amendment Act’), which received Presidential assent on April 6, 2026, marks a significant shift by introducing the Creditor-Initiated Insolvency Resolution Process (‘CIIRP’) under the newly inserted Chapter IV-A (Sections 58A to 58K) of the Code, as introduced by the Amendment Act.

    The mechanics of CIIRP are relatively straightforward. Section 58B of the amended Code (Initiation of Creditor-Initiated Insolvency Resolution Process) permits a Financial Creditor (‘FC’) belonging to a class notified by the Central Government and holding at least 51% of the financial debt by value to initiate CIIRP by issuing a 30-day notice to the Corporate Debtor (‘CD’). If the default is not resolved within this period, a Resolution Professional (‘RP’) appointed by the initiating creditors makes a public announcement commencing the process. Crucially, the CD’s management is not suspended. It remains in control under a Debtor-in-Possession (‘DIP’) model, subject to the RP’s oversight, with the process running for 150 days, which is extendable up to 45 days.

    The CIIRP, however, contains a structural flaw that undermines these ambitions. Unlike the standard Corporate Insolvency Resolution Process (‘CIRP’), the CIIRP provides no automatic moratorium at commencement. The RP must separately apply to the National Company Law Tribunal (‘NCLT’) for a moratorium after the public announcement of CIIRP, leaving a legally uncovered window during which any creditor may race to the NCLT and trigger a  CIRP petition. Compounding this is the absence of any DIP financing mechanism in Chapter IV-A, leaving management in nominal possession of the enterprise but with no statutory path to working capital.

    II. The Moratorium Gap and the Race-to-CIRP Problem

    The moratorium under the standard CIRP operates as the structural foundation of the entire resolution process. Under Section 14 of the IBC, an automatic stay on suits, enforcement of security interests, asset transfers, and recovery actions against the CD takes effect immediately upon the NCLT’s admission of a petition.  It ensures that all creditors engage the resolution process simultaneously, preventing any single creditor from obtaining preferential recovery by acting ahead of the others.

    The CIIRP departs from this design. Under Chapter IV-A as enacted, the RP makes a public announcement commencing the CIIRP after the requisite 51% creditor approval under Section 58B. A moratorium does not take effect at that point. The RP must subsequently apply to the NCLT for one, and the moratorium takes effect only upon the NCLT’s order. Between the public announcement and the tribunal’s order, the CD’s assets remain exposed and enforcement actions remain available to creditors.

    This gap creates a specific and traceable risk. Section 11 of the IBC, as amended, bars a CD already undergoing CIIRP from being subjected to a fresh CIRP. The bar, however, operates only once the CIIRP is formally underway and a moratorium is in place. A non-notified Financial Creditor, one ineligible to initiate CIIRP because it falls outside the Central Government’s notified class, retains the right to file an application under  Section 7 (Initiation of CIRP by FC) of the IBC once the public announcement is made, but before any moratorium is granted. Under the mandatory admission mechanism introduced by the same Amendment Act, which now compels the NCLT to admit a petition on proof of debt and default within fourteen days of filing, such a petition is likely to be admitted promptly. Once a CIRP commences on admission, the Section 11 bar activates to protect the CIRP, not the CIIRP, displacing the latter entirely.

    The primary argument against this concern is that the Central Government’s notification of eligible CDs and FCs will be drafted carefully enough to manage the risk. This argument, while understandable, misreads the statutory problem. The notification governs who may initiate CIIRP; it says nothing about when the moratorium takes effect. A non-notified creditor holding a valid claim against a notified CD faces no statutory bar to filing a CIRP petition during the moratorium gap. Until  Section 240 (Power of Central Government to Make Rules) of the IBC is exercised to extend moratorium protection to the moment of the public announcement, or until Parliament amends Section 14 to expressly include CIIRP commencement within its scope, this risk is embedded in the statutory text and cannot be managed away by notification design.

    Of particular relevance in this regard is the approach adopted by the United Kingdom through the Corporate Insolvency and Governance Act, 2020 (‘CIGA’). Part A1 of the Insolvency Act, 1986, as introduced by CIGA, provides a free-standing moratorium that takes effect automatically upon filing, without any separate court application, immediately restraining creditor enforcement actions for an initial period of 20 business days. This automatic protection was specifically designed to prevent the kind of creditor race that the CIIRP’s moratorium gap now invites. When enacting Chapter IV-A, Parliament had the benefit of this model; its decision not to replicate an automatic moratorium is a design choice whose consequences require correction.

    III. The DIP Financing Vacuum

    Even if the moratorium gap were addressed, the CIIRP faces a second structural problem. The DIP model at the heart of Chapter IV-A requires the CD’s management to continue operating the enterprise during the 150-day resolution window, and sustaining operations requires working capital. Securing that working capital during an insolvency process, in turn, requires lenders willing to extend fresh credit to a distressed entity.  The empirical backdrop lends urgency to this concern: as per the Insolvency and Bankruptcy Board of India (‘IBBI’) data as of October 2025, over 2,800 CIRPs have ended in liquidation orders, with average creditor recoveries of approximately 6% of admitted claims in liquidation, compared to 32.76% in resolved cases. This differential underscores the premium that early, going‑concern‑preserving intervention commands, and it is precisely that premium which DIP financing is designed to secure.

     Chapter IV-A contains no provision for such financing. There is no statutory basis for granting priority, let alone super-priority, to creditors who extend credit to a CD during an ongoing CIIRP. A commercial lender asked to extend working capital to such a CD faces the prospect of those advances ranking pari passu with pre-petition debt under Section 53 (Distribution of Assets) of the IBC in any subsequent CIRP or liquidation. The Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India held that the IBC is a complete code and that priorities under it are statutory, not equitable; courts will not imply a super-priority that Parliament has not enacted. The IBBI committee report of April 2, 2026, which proposed draft CIIRP regulations to operationalise the new Chapter, addresses several procedural details but does not propose a DIP financing mechanism, confirming that this gap remains live and unaddressed in the regulatory framework as currently proposed.

    Of particular relevance here is the approach adopted in Singapore through the Insolvency, Restructuring and Dissolution Act, 2018 (‘IRDA’). Sections 67 and 101 of the IRDA provide that creditors extending rescue financing to a debtor undergoing a scheme of arrangement or judicial management may, upon court authorisation, obtain super-priority over all other claims and administrative expenses in the event of a subsequent liquidation. Singapore’s Parliament thus recognised that the DIP model is commercially inoperative without a statutory financing incentive. The IRDA model is particularly apt for India’s institutional context: unlike the United States Chapter 11 approach, where DIP financing priority is negotiated contractually and is thereafter confirmed by the court, the IRDA conditions priority on prior judicial authorisation a design that preserves creditor oversight and is structurally consonant with the CoC-centred governance architecture already established under the IBC.

    IV. Corrective Prescriptions for Subordinate Legislation

    These gaps are correctable through subordinate legislation before the Amendment Act is brought into force, provided the IBBI and Central Government approach them as structural corrections rather than optional refinements.

    The first and most urgent correction is to extend moratorium protection to the moment of the RP’s public announcement of CIIRP commencement. The Central Government holds rule-making power under Section 240 of the IBC and the IBBI holds regulation-making power under Section 240A (Power of Board to Make Regulations); either authority could be deployed to prescribe an interim stay, co-extensive in scope with Section 14, taking effect from the date of the public announcement and operates until the NCLT’s formal order. The UK’s automatic Part A1 moratorium under CIGA demonstrates that an immediate, filing-triggered stay need not require judicial pre-authorisation to be effective; India’s subordinate legislation can replicate that outcome within the existing statutory architecture. The more durable solution is a Parliamentary amendment expressly bringing CIIRP commencement within Section 14’s automatic moratorium, and the IBBI’s ongoing regulatory process presents the appropriate occasion to recommend this to the Ministry of Corporate Affairs.

    The second correction is the introduction of a CIIRP-specific interim financing provision. The IBBI’s draft regulations should prescribe that advances extended to a CD during an ongoing CIIRP by any lender, whether or not a member of the Committee of Creditors (‘CoC’), shall, upon approval by at least 66% of the CoC by value and NCLT sanction, rank as priority claims ahead of pre-petition unsecured debt in any subsequent CIRP or liquidation. This voting threshold mirrors the one prescribed for approval of CIIRP resolution plans, ensuring that the same majority empowered to approve the ultimate resolution also authorises interim financing on priority terms. Further reinforcing this design, the Singapore model, court-authorised super-priority under Sections 67 and 101 of the IRDA, demonstrates that such a mechanism can be operationalised through regulations requiring NCLT approval as a condition precedent, preserving judicial oversight while creating the commercial certainty that lenders require.

    Lastly, the notification of eligible FCs must extend CIIRP initiation rights to Asset Reconstruction Companies (‘ARCs’) registered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) and to distressed debt funds that have acquired financial debt through assignment in the secondary market. Confining the notification to scheduled commercial banks would create a sub-classification within the class of financial creditors based on the mode of acquisition rather than the economic character of the claim. The analysis in Swiss Ribbons Pvt. Ltd. v. Union of India, which upheld the financial-operational creditor distinction on the ground that the two classes are intelligibly differentiable in their commercial roles, does not support a further sub-classification within financial creditors that tracks institutional form rather than economic function.

    V. Conclusion

    The CIIRP is the most structurally innovative provision the IBC has seen since its enactment in 2016. The DIP model, the compressed 150-day timeline, and the out-of-court initiation framework, each represent genuine advances over the CIRP’s tribunal-dependent architecture. These advances, however, are contingent on scaffolding that the Amendment Act does not presently provide. The absence of an automatic moratorium at CIIRP commencement creates a race-to-CIRP process vulnerability that can collapse the framework before any resolution plan is formulated. The absence of a DIP financing mechanism reduces incumbent management’s role to a formality, depriving the CIIRP of the going-concern preservation it is designed to achieve.

    Accordingly, before the Central Government notifies the commencement date for the Amendment Act, the IBBI’s subordinate legislation must incorporate three targeted corrections: an automatic interim stay operative from the date of the public announcement, on the lines of the UK’s Part A1 moratorium; a CoC-approvable and NCLT-sanctioned priority mechanism for fresh credit, on the lines of Sections 67 and 101 of Singapore’s IRDA; and an FC notification that includes ARCs and  holders of assigned financial debt. Without these corrections, the CIIRP will generate the contested, tribunal-heavy litigation it was specifically designed to avoid.

  • Shriram-mufg: a deal that outmastered the open-offer regime ?

    BY AMIT KUMAR, FOURTH-YEAR STUDENT AT CHANAKAYA NATIONAL LAW UNIVERSITY, PATNA

    INTRODUCTION

    On its face, Mitsubishi UFJ Financial Group (“MUFG”)-Shriram Finance Limited (the “Company”) arrangement is a headline grabbing largest foreign direct investment of 2025 in financial service sector, a 20% equity subscription that promises capital and governance support. Underneath that neutral form, however, the deal bundles governance covenants, board nomination rights and large promoter payout that when analysed together mirror a transfer of economic and managerial control. This article argues that Securities Exchange Board of India’s (“SEBI”) takeover and listing rules were strained to their formal limits by a deal that preserved technical compliance while raising serious questions about the protection of minority shareholders and the integrity of open offer regime.

    DEAL BACKGROUND

    The deal, between MUFG and the Company, signed and approved by the board of directors of the Company in December 2025, received the greenlight of the shareholders of the Company in the extraordinary general meeting held on 14th January, 2026. After receiving all the regulatory approvals including that of the Competition Commission of India, the Board of the Company approved the preferential allotment to MUFG on 8th April, 2026. Under the deal, MUFG would get the 20% stake in Shriram finance for approx. ₹39,618 crore (around $4.4 billion) by way of preferential allotment. In return, MUFG got the right to nominate two non-independent directors to Shriram Finance’s board. It also got the right to second up to six representatives in the management of the Company which implies that MUFG retains the authority to influence the management, the right which is not available for other shareholders. Along with it, MUFG got the anti-dilution right and reserved matters protections, implying that certain key decisions cannot be taken without the concurrence of MUFG. The deal makes MUFG a strategic investor in the Company and positions MUFG differently in comparison to the other shareholders of the Company and keeps its position above the other shareholders.

    DEAL BACKGROUND

    What makes the deal more noticeable is the separate unusual non-compete fee of $200 million to the Shriram Group’s promoter entity Shriram Ownership Trust (the “SOT”), which is a private discretionary trust established in 2006. The said fee makes about 5% of the deal. This payout brings forth the two critical challenges. Firstly, the payout would go to over 40 beneficiaries of the SOT, rewarding the very management that will continue to be part of the Company. Secondly, Shriram Capital, through which the SOT is holding the shares of the Company, will continue as an investor of the Company. However, the promoters’ stake would come down to 20.3% from 25.39% post the deal. Additionally, the nature of the SOT blurs the distribution of the said fee among over 40 beneficiaries. All these facts imply that it is inconsistent with the traditional purpose of a non-compete clause. Traditionally, a non-compete fee is intended to compensate outgoing promoters for agreeing to refrain from engaging in competing businesses, thereby protecting the acquirer’s investment, goodwill, and market position. Therefore, it necessitates a discussion on such strategic investments, which tick boxes the regulatory requirements but outsmarts the regulatory requirements in substance.

    As per Regulation 8(7) of The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the ‘Takeover Code’), the meaning of price adopts a substance over form approach, under which the price paid for shares of the target company is not confined to the consideration reflected in the share purchase agreement. Instead, it encompasses all payments made or agreed to be made for shares, voting rights, or effective control, whether routed through incidental, contemporaneous, or collateral agreement, and regardless of whether such payments are described as control premium, non-compete fees, or any other contractual label. But the current non-compete fee would have fallen under this regulation, had the Takeover Code been triggered based on extant definition of control discussed below.

    Moreover, Regulation 26(6) of the SEBI Listing Obligations and Disclosure Requirements Regulation, 2015 bars side dealings of such nature without the prior approval of the board and the shareholders of a listed entity, which has been complied with and the deal has received the approval of the both in the current deal. Despite formal approval, the non-compete fee effectively operates as a side dealing since it provides an additional, transaction-linked benefit exclusively to the promoters, rather than being part of the main consideration available to all shareholders.

    Further, it may be contended that the non-compete fee payable under the transaction was fully disclosed and approved by shareholders. However, regulatory compliance is not exhausted by disclosure and consent alone. The decisive issue is whether such consideration, notwithstanding its disclosure, constitutes part of the price, paid for acquisition of control. If a non-compete payment, viewed in conjunction with governance rights and strategic covenants, operates as consideration for ceding influence or conferring decisive control, shareholder approval cannot obviate the mandatory obligations under the Takeover code, which are triggered by substance rather than form. Moreover, while a non-compete fee is not illegal per se and is a commonly accepted practice globally, its legitimacy lies in compensating an exiting promoter or investor for relinquishing control and agreeing not to compete with the business. However, this fundamental rationale appears to be absent in the present case, as the promoters are neither exiting the company nor disengaging from its management, and will continue to remain significant shareholders with ongoing involvement in the business. As reported, the payment effectively accrues to a promoter group that continues to run and control the company, thereby blurring the distinction between a genuine non-compete consideration and an additional transaction-linked benefit.

    THE CONTROL QUESTION: REGULATION 4 OF SEBI TAKEOVER CODEe

    The Regulation 3 of the Takeover Code requires an acquirer to make an open offer if it crosses the shareholding threshold limit of 25% or more, or the existing shareholder holding more than 25% makes creeping acquisition of 5% or more in a financial year. Further Regulation 4 gets triggered, if there is acquisition of control in the target company. In the current deal of MUFG-Shriram Finance, the subscription of shares of 20% of the Company is well below the threshold limit. Moreover, the deal provides for the preferential issue of new shares, which falls under the general exception of the Regulation 10(2B) of the Takeover Code, thereby MUFG is not required to make any open offer. The preferential allotment connotes that MUFG is not acquiring, rather it is infusing fresh capital in the Company.

    However, Regulation 4 of the Takeover Code prohibits the acquisition of control over the target company, irrespective of acquisition or holding of shares or voting rights in the target company without an open offer. This regulation is triggered solely on the acquisition of control, irrespective of other quantitative considerations of limits provided under the Takeover Code. Unlike other quantitative criteria under the Takeover Code, this regulation is a qualitative criterion and discretion of invocation is vested with the SEBI to gauge the requirement of open offer by the acquirer in a given facts and circumstances. Accordingly, it is necessary to analyse the scope of ‘control’ under Regulation 2(1)(e) of the Takeover Code, which broadly includes the right to appoint a majority of directors and to exercise control over management and policy decisions.. These rights can be exercised directly or indirectly by one person or more than one person who are person acting in concert. Further, such rights can accrue to a person by way of shareholding, management rights, shareholders agreements, voting agreements and in any other manner. The definition of control under the Takeover Code has been reviewed many a times and it has been left as it is to be decided by SEBI on the basis of each case. Firstly, the Bhagwati Committee, constituted in 1995 to review the old SEBI Takeover Code of 1994, recommended the broad definition and opined that it should be left to SEBI to decide basis each case. Further, the Takeover Regulations Advisory Committee (“TRAC”), in its report dated July 19, 2010, reiterated the same views, and currently, the same definition is there in the Takeover Code.

    Later, to determine the Brightline test for acquisition of control the SEBI floated a discussion paper on March 14, 2016 to seek comments of the public, pursuant to representations made by the market participants to provide guidance in respect of protective rights which would not amount to acquisition of control. Protective rights are negative in nature and aim to safeguard an investor’s interests, such as veto rights over fundamental matters like changes to charter documents, capital structure, or related party transactions. As they do not permit involvement in day-to-day management or policy decisions, they are generally not treated as ‘control’. However, rights enabling influence over management, appointment of key personnel, or business strategy may amount to acquisition of control. After receiving a number of comments from various stakeholders, the SEBI, in its press release dated September 08, 2017, decided to continue with the existing extant definition of acquisition of control in the Takeover Code, while observing that “any change or dilution in the definition of acquisition of control would be having far-reaching consequences since similar definition of control exists under the Companies Act, 2013 and other laws”.

    PROTECTIVE RIGHTS OR PARTICIPATORY CONTROL?

    Now looking at the MUFG-Shriram deal, the deal involves three key aspects: the right to second six personnel to the Company, an anti-dilution clause, and certain reserved matter protections. These elements need to be examined in light of the existing definition of ‘control’ as consistently interpreted by committees and SEBI over the past two decades.. As per proxy advisory firm Stakeholder Empowerment Services (‘SES’), right to second six appointments would amount to management influence in substance. SES’s report notes that these secondees’ role is unknown and are going to operate inside the management, such strategic presence goes beyond arm’s length oversight. SES further notes that with anti-dilution rights and reserved matters protections, MUFG wields strategic influence over key decisions where its concurrence would be required, thereby elevating its position from a passive investor to that of gatekeeper of strategic decisions. Thus, question arises as to whether such strategic investors would be considered to have gained only protective rights or participatory rights making the case for open offer under the Takeover Code?

    In SEBI v. Subhkam Ventures Private Ltd., (“Subhkam Ventures”) the Supreme Court (the ‘SC’) intervened to define the definition of control but failed to give any decisive guidance and left the question of law open, while clarifying that Securities Appellate Tribunal’s (the ‘SAT’) order would not be treated as precedent. In this case, the SAT met with a situation wherein the acquirer sought to acquire 19.91% stake of the target company.  It held that right to nominate one director from a group and along with veto rights would not constitute control. Para 8 of the SAT order is worth mentioning, wherein it held that “list of protective matters provided from clause 9(a) to 9(o) are not in nature of day-to-day operational control over the business of the target company. So also, they are not in the nature of control over either the management or policy decisions of the target company”. Further in the para, the SAT held that requirement of affirmative vote in appointment of key officials of company like CS, CEO, CFO, COO etc., would not amount to control as it cannot get its candidate appointed.

    Applying the reasoning of para 8 of the SAT’s order in Subhkam Ventures, the present deal raises an important issue, whether the right to nominate or second six representatives to the Company’s management amounts to ‘control’. In Subhkam Ventures, the acquirer only had affirmative voting rights, which did not ensure actual appointment. In contrast, MUFG appears to have a direct right to place its representatives within the management, giving it a more active role.

    In my view, this difference matters. Having multiple representatives inside management can allow MUFG to influence business decisions and the day-to-day functioning of the Company. This goes beyond mere protective rights and moves closer to participatory control. Therefore, these rights may not fit within the limited scope of protective rights recognised in Subhkam Ventures and instead point towards a degree of de facto control.

    CONCLUSION

    Apparently, the deal ticks all the regulatory boxes. The investment remains below the 25% threshold, it may claim exemption under Regulation 10(2B), got the shareholders’ approval, and disclosures have been carefully made. On paper, there is little to object to. But transactions do not operate on paper alone. When the arrangement is examined as a whole, including board nomination rights, extensive managerial secondments, veto driven reserved matters, and substantial side deal of $200 million to the promoters in the guise of non-compete fee, a more complicated picture of the deal. Such engineered arrangement’s influence that may not cross the numerical definition of control, yet significantly reshapes who holds real power within the Company.

    India’s takeover framework was never intended to function as a mere checklist. Regulation 4, read together with the deliberately broad definition, reflects conscious regulatory choice. SEBI was empowered to look beyond formal shareholding percentages and examine where influence is acquired in substance. The central inquiry was always meant to be who effectively directs the affairs of the company. The MUFG-Shriram deal sits in an uncomfortable space. It may not amount to a classical transfer of control, but it also places MUFG far beyond the position of an ordinary financial or even conventional strategic investor. At the same time, the promoters receive economic benefits, particularly through the non-compete consideration, that dilute the parity principle embedded in the open offer regime. This principle is meant to ensure that all shareholders receive an equal opportunity when control or near control shifts.

    For minority shareholders, this creates a structural vulnerability. Their protection exists in law, but their effectiveness becomes uncertain in complex and heavily engineered transactions. Therefore, the real question is not whether the MUFG-Shriram deal complies with the letter of law. The deeper and more troubling question is whether the law, as it is currently interpreted and enforced, remains capable of capturing control in its modern and increasingly nuanced forms. The lack of a clear regulatory response to this question is what should concern regulators and market participants alike.

  • Recalibrating ETF Price Controls: SEBI’s Proposals on Base Price and Price Bands

    By Kavya Jindal, Third-year Student at NLUO, Cuttack

    INTRODUCTION

    Exchange Traded Funds (‘ETFs’) have a distinct place in the Indian capital markets. Despite being similar to mutual fund schemes, they can be bought and sold in the stock exchange market as regular stocks would. The value of the ETFs is based on the underlying asset, which could be equity index, debt instruments, or commodities. In light of the same, the Securities and Exchange Board of India (‘SEBI’), on 1 February 2026, released a consultation paper (‘the Paper’) putting forth major reforms to the mechanism that governs base price determination and price bands for ETFs.

    These reforms are prompted by the structural inefficiencies and heightened volatility primarily in gold and silver market, which have been consistently witnessed over the past few months. SEBI’s proposals show an inclination towards a more dynamic regulatory system based on data. This blog discusses the structural changes recommended in the Paper and their impact on ETF markets. It further analyzes the extent to which these recommendations can solve the problem of volatility, price discovery in the market and strengthening market stability.

    KEY STRUCTURAL CHANGES PROPOSED

    Revision of base price determination

    The price bands for ETFs, under the existing framework, are calculated using the Net Asset Value (‘NAV’) of T-2, which is two trading days prior. This model leads to an inherent lag and does not rightly capture latest market developments. Therefore, SEBI has proposed shifting to T-1 reference values for determination of the base price on the trading day.

    Multiple alternatives have been outlined in the Paper for such determination. These include: firstly, usage of T-1 closing traded price of the ETF, calculated as the weighted average price of the last 30 minutes of trading; secondly, the T-1 closing NAV, where it is available in time; thirdly, the average indicative NAV (‘iNAV’) of the last 30 minutes on T-1; lastly, the latest available iNAV on T-1. All of these alternatives aim to balance timelines with reliability.

    Rationalisation of price bands

    The present regulatory framework prescribes a fixed price band of ±20% for most ETFs and ±5% for overnight ETFs. SEBI has now proposed to move away from this one-size-fits-all approach by introducing differential initial price bands based on volatility profile of different ETF categories.

    For equity and debt ETFs, the Paper introduces an initial price band of ±10%. This will include the possibility of flexing upward to ±20% during the trading day.  For commodity ETFs, specifically gold and silver ETFs, a narrower initial band of ±6% is proposed. This reflects their association with global markets for commodities as well as derivatives and the inclusion of price limit adjustments in stages. Also, given the very low volatility associated with overnight ETFs, they will still remain subject to the existing ±5% price band. The different approach seeks to ensure that the permitted intraday price fluctuation is closer to reality.

    Introduction of a flexing mechanism

    The proposal of a dynamic flexing system appears to be a very important one. Instead of having a rigid range throughout the day, the initial band of ±10% or ±6%, in the case of equity/debt and commodity ETFs, respectively, can be extended after its threshold has been breached. After that point, there would be a temporary suspension of transactions until stability has been restored in the market.

    CRITICAL ANALYSIS AND IMPLICATIONS

    Base price reform: addressing the 1-day lag

    Under the existing system, ETF price bands are determined using the closing NAV from T-2 (two days earlier). This inherently creates a one-day informational lag. This approach most likely appears to stem from operational limitations and time needed to disclose NAVs. However, relying on an outdated reference point has created structural lags and thereby contributed to heavy instability and increased volatility in the market. Due to this, there are chances of distortion of price alignment between ETFs and their underlying assets.

    This may even affect the efficiency of arbitrage and thus affect the process of price discovery. The whole idea of arbitrage lies in the trader’s ability to exploit small differences between the ETF and its underlying asset. Since the NAV is determined using outdated data that does not represent current market values, arbitrage becomes difficult and allows prices to remain at a difference for longer than expected.

    In the case of commodity ETFs, this becomes extremely serious since there is always a disparity in global prices all the time depending on time zones. Before the Indian market responds, the reference NAV would have become out of date, hence contributing to increased volatility and mispricing. Dividends and bonuses from corporations may need a manual update to the NAV, which poses challenges and makes it prone to mistakes. In today’s electronic markets, there is a need for quick processing and adjustment of prices according to new information. It is important to note that through automation, information on NAV is automatically updated without any manual input whatsoever, which reduces chances of delay or inaccuracies.

    The transition to T-1 reference values in terms of NAV can be extremely effective in ensuring a greater degree of informational symmetry. With regards to ETF pricing, the transition will provide a more accurate estimate of the intrinsic value of ETFs. This would ensure that there is a greater degree of alignment with reality and that there would be a lower level of volatility due to outdated information.

    However, using iNAV also presents certain challenges. Being an indicative measure, it could sometimes present outlier estimates of prices. In order to address this, SEBI must consider this risk when implementing any change towards real-time data usage. In any case, the new reform would likely lead to a more aligned relationship between ETF prices and the underlying asset values.

    Price band rationalisation: from static to dynamic controls

    Most ETFs, up till now, operate under a uniform ±20% daily price band, irrespective of underlying volatility. The empirical data cited by SEBI reveals that over 90% of equity and debt ETFs fluctuated within 10% in a trading day. Commodity ETFs on the other hand, remained broadly within 9%. Thus, the 20% band seems too wide when compared to the actual trading behaviour. There are differences in volatility profiles across ETFS, which is the primary issue with uniformity as it disregards these differences. A static band of 20% fails to reflect both, the empirical evidence and market structure. This in a way allows excessive price fluctuations which are not connected to the underlying fundamentals.

    Introduction of initial ±10% (equity/debt) and ±6% (commodity) bands will better align regulatory thresholds with empirical data. This adjustment holds the potential to curb excessive market speculation and strengthen investor confidence. Further, this could also support more orderly price discovery by limiting sharp intraday fluctuations.

    However, cooling-off pauses may occur more frequently if the limits are reached often. This could affect market liquidity. Market participants must adapt to a system where volatility management is more nuanced and data driven, instead of uniformly permissive.

    Controls the flexing mechanism: stability vs. trading friction

    The flexing regime is an important innovation. Once the initial range of prices is attained, there will be a pause/cooling-off period of about 15 minutes. The range will expand in stages once the necessary thresholds have been achieved. The idea here is to differentiate between price discovery and possible manipulation. By linking any relaxation of limits to adequate market depth and participation, SEBI aims to introduce surveillance into the market structure itself.

    The complexity involved in implementation cannot be ignored cannot be overlooked, regardless it being theoretically efficient and accurate. For controlling the thresholds of trading and making necessary adjustments, it is important to have proper technology. Frequent intraday pauses can lead to many problems for institutional traders and disrupt algorithms used in trading. Also, the activities of arbitrageurs, who help to keep the ETF price stable and in line with the price of underlying assets, may become limited during cooling-off periods. The activities of arbitrageurs include purchasing an under-valued asset and selling an over-valued one in order to correct the discrepancy between the ETF price and the price of underlying assets. However, due to restrictions imposed on trading, it becomes impossible for arbitrageurs to conduct their operations.

    Therefore, the flexing mechanism if executed effectively, has the potential to enhance systemic resilience while preserving price discovery integrity. This indicates a regulatory shift towards dynamic circuit controls.

    Commodity ETFs: global linkages and regulatory sensitivity

    Gold and silver ETFs are uniquely sensitive to international price movements. Global commodity markets operate across time zones. Indian exchanges on the other hand, function within fixed trading hours. In January-February 2026, primarily, such heightened volatility brought out the incompetency of the T-2 based system and exposed its weakness.

    To put forth an example, Gold ETFs plunged sharply by almost 7% in a single session and overall witnessed a drop of around 18% from their peak on 29 January, 2026. Likewise, Silver ETFs faced extreme volatility with many hitting almost the 20% lower circuit, even though their actual decline during the season was around 10-15%. These extreme disruptions were primarily triggered by sharp movements in global markets. On one day, international spot gold prices dropped by 10%, and silver prices crashed nearly 30% in a single day. Both of them indicative of one of the steepest and worst declines on record. 

    In light of the same, the proposal by the SEBI to introduce an initial ±6% band brings commodity ETFs in line with the overall daily price limits applicable to derivate contracts. Permitting the band to expand in increments of 3% posits sensitivity to movements in global prices, simultaneously, also maintaining an overall cap of 20%.

    This approach promotes coherence and integrity across trading segments. However, if the band expands too frequently, there is also a possibility of enhanced intraday halts especially in volatile global scenarios. Therefore, the proposals if executed should be done with utmost precision, so that the intended motive can be achieved.

    Broader market implications

    The proposals also carry with them implications beyond technical rectifications. Narrowed initial bands at the initial stage along with cooling-off periods will most likely enhance protection for retail investors, against sudden volatile spikes, as has been aimed rightly. Further, for Asset Management Companies (‘AMCs’) improved alignment curtails reputational risk arising from price-NAV derivations. Exchanges benefit from more structured volatility management tools.

    However, arbitrageurs and institutional traders must necessarily adjust to possible trading halts and conditional relaxation of the bands. Over time, if properly implemented, such regulatory changes will contribute to more disciplined behaviour and minimize the impact of speculation within the market. From a systemic perspective, the regulatory changes constitute an example of preventive regulation designed to rectify inherent inefficiencies that might otherwise lead to instability within the market system.

    CONCLUSION AND WAY FORWARD

    The paper can be seen as an illustration of a shift towards a recalibration of ETF markets. Of the possible choices of base price, it may be more sensible, commercially speaking, to use the closing price traded or closing NAV at T-1 than using the latest iNAV as it is vulnerable to outliers. Moreover, it would make sense to introduce the changes in phases, specifically when dealing with commodity ETFs. This would allow the market players to adjust to the new system without difficulty. To conclude, the shift from the strict 20% band to the more fluid and contingent system represents a major step forward in terms of regulation. The effectiveness of such a move would depend not only on its design but also on how well it is implemented and enforced.

  • RETHINKING REJECTION OF POST-LCD ADJUDICATED CLAIMS IN LIQUIDATION UNDER THE IBC

    RETHINKING REJECTION OF POST-LCD ADJUDICATED CLAIMS IN LIQUIDATION UNDER THE IBC

    BY MUSKAN JAIN, QAZI AHMAD MASOOD, FOURTH – YEAR STUDENTS AT RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PUNJAB

    INTRODUCTION

    Consider an example of a defective product in which a consumer seeks a refund before a store shuts, but the defect is detected after closing, and the refund is not given. This seems unjust since the right had existed before; it was just delayed in being confirmed. The same problem occurs with insolvency. The number of claims is usually decided on the Liquidation Commencement Date (‘LCD’), but liabilities like taxes, regulatory fines, or damages under contract are usually determined later by adjudication. This raises the key question: If the underlying right arose before the LCD but the amount was determined later, should the claim be rejected? This article examines this issue.

    The article explores whether the judicial trend to annul claims brought forward after the LCD, as observed in the recent case of SEBI v. Rajiv Bajaj, is in line with the statutory provisions of the Insolvency and Bankruptcy Code, 2016 (‘IBC’ or the ‘Code’) or not. It challenges the National Company Law Appellate Tribunal (‘NCLAT’), which focuses more on the LCD as a rigid cut-off, which does not involve claims like tax demands or regulatory penalties due to pre-liquidation activity.  The article argues that this rigidity undermines the Code’s broad definition of “claim,” the liquidator’s power to estimate unliquidated liabilities, and the continuation of proceedings during liquidation.

    RECOGNITION OF PRE-LCD CLAIMS AND POST-LCD QUANTIFICATION UNDER THE IBC

    Section 3(6) of the IBC broadly defines a claim as a right to payment, which can include disputed, contingent, or unliquidated sums. Consequently, there can be a claim even in cases where the amount remains undecided or is in the process of adjudication. The Code distinguishes between the existence of a right to payment and subsequently ascertaining its value, i.e., a liability may be incurred by pre-LCD events even though the value is determined subsequently.

    Section 33 provides that the liquidation commences following the failure of the Corporate Insolvency Resolution Process (‘CIRP’), marking the LCD. Creditors submit claims before the liquidator under Section 38, which he validates and either admits or rejects under Sections 39–40. Although the courts tend to consider the LCD as a cut-off for certainty in the distribution, the Code does not prohibit later quantification of liabilities generated out of pre-LCD obligations.

    Section 33(5) further permits the statutory proceedings to be instituted against a corporate debtor (‘CD’) in liquidation with the sanction of the adjudication authority. This reflects realism in the law as regulatory, taxation, and arbitral procedures are frequently multi-staged and cannot be terminated when liquidating. Parliament authorised the tribunals to determine the continuance of such proceedings instead of requiring termination at the LCD. The contradiction of doctrinal nature appears in the cases when the proceedings are permitted to proceed, and yet their results are not considered in the liquidation estate. This issue surfaced in SEBI v. Rajiv Bajaj, wherein the proceedings were permitted, yet their outcome had no distributive effect.

    This has two effects: the license granted in Section 33(5) turns out to be largely illusory, and jurisprudence turns inconsistent, in that the issue of liability can be established, but has no distributive effect. A logical approach involves dealing with claims on grounds of their pre-LCD nature and dealing with post-LCD quantification by use of liquidator estimation under Regulation 25, provisional admission of claims, and escrow or holdback provisions. In the absence of such harmonisation, Section 33(5) risks permitting adjudication in form and not in economic substance.

    THE NCLAT APPROACH: FREEZING LIABILITIES AS ON LCD AND THE CONCEPTUAL ERROR OF CONFUSING THE EXISTENCE OF A CLAIM

    The jurisprudential challenge with the dogmatic doctrine of LCD-freeze is that it confuses three analytically separate terms of existence, crystallisation, and quantification of liability. Liability arises due to the actions of the debtor- breach of contract, violation of the statutes, torts, or violation of regulations. Crystallisation is a process through which the liability is formally confirmed by the court or authority, whereas quantification is the process through which the numerical value of the owed amount is established. These phases can both be sequential and non-constitutive.

    Adjudication does not create liability; it acknowledges and ascertains it. A claim can thus exist even if contested, conditional, or even unquantified. Handling the absence of adjudication as the lack of liability replaces procedural timing with substantive existence. Following this logic, the amount of taxes payable, penalties, or regulatory fees based on the discovery of the LCD is exempt on the basis that the liability did not exist earlier.

    Such an approach was observed in SEBI v. Rajiv Bajaj, wherein the liquidator declined the claim by SEBI to impose a penalty of 21.80 lakh, since this penalty was imposed after the LCD. The court of appeal ruled that only claims crystallised as they were on the LCD can be admissible under Regulations 12(2)(a) and 13 of the Insolvency and Bankruptcy Board of India (‘IBBI’) (Liquidation Process) Regulations, 2016. However, this fails to appreciate a crucial distinction, which is the fact that the existence of liability and its quantification are distinct. A claim can already exist where the wrongful conduct preceded the LCD or proceedings were already started before the LCD, or the final amount was not obtained due to procedural delays.

    The equation of “unadjudicated” with “non-existent” eliminates contingency liabilities and makes legitimate pre-LCD obligations disappear, distorting the true financial status of the CD. A doctrine that ties the existence of claims to post-facto crystallisation makes insolvency a matter of procedural finality as opposed to substantive accounting of rights. The rigorous LCD crystallisation method thus favours the time of adjudication, rather than the juridical content of liability, and is conceptually limited and practically rigid.

    REASONS AGAINST THE NCLAT POSITION

    The institutional issues underlying the LCD-freeze approach cannot be dismissed on the basis of doctrinal criticism only. The need for finality is the best argument. Liquidation is a time-bound process aimed at realising and distributing assets with predictability, allowing continually changing liabilities risks to delay closure and undermine commercial certainty. Intimately linked here is the inability to estimate complex or speculative claims, including contingent tax liabilities, regulatory fines, or litigation-based damages, which might be beyond the knowledge of the liquidator and lead to arbitrary valuations or exaggerated claims.

    Another concern is the potential destabilisation of the distribution waterfall. When liabilities after LCD are recognised following interim or final distributions, the previously paid dividends may need to be recalculated, which interferes with predictability and creditor confidence. An effective administrative burden exists, as well, in the fact that the liquidator can only realise and distribute assets, and not make specialised forensic decisions as to liability.

    It is not a question of absolute finality and unrestricted uncertainty, but one of moderated inclusion and categorical exclusion. Rejection of post-LCD claims is disproportionate. The middle ground is in the estimation mechanisms under tribunal control and backed by safeguards, which is more efficient, fairer, and more practical to the institution.

    OVERLOOKING REGULATION 25: POWER TO ESTIMATE CLAIMS

    This strictness of the exclusion of claims that are measured following the Liquidation Commencement Date ignores a vital stipulation in the liquidation apparatus Regulation 25 of the IBBI (Liquidation Process) Regulations, 2016. The provision recognises that insolvency often involves liabilities whose value cannot be precisely determined and therefore requires the liquidator to estimate claims where the amount is uncertain due to contingency or other reasons. The language is significant. The regulation compels the liquidator to find a reasonable value for which no exact quantification can be made by applying the term shall estimate. It does not permit rejection just because a claim is contingent, contested, or even under adjudication.

    The provision is an assumption of the structure of the Code: liquidation should occur even in the case of uncertainty. Estimation is the institutional process by which this uncertainty is dealt with without eliminating legitimate liabilities. Practically, estimation can be based on objective references like the statutory penalty list, precedents of similar cases, the role of the proceedings, documentary evidence, or the opinion of experts. Conservative/range-based valuations can maintain distributional certainty, but they need to be sure that the liquidation estate captures the potential liabilities.

    The failure to observe Regulation 25 thus distorts the concept. The consideration of the lack of final adjudication as a reason to be rejected makes it practically impossible to make the pre-liquidation liabilities invisible. In addition, a harsh freeze of LCD can serve as a motive to take a strategic pause in the regulatory or statutory action in such a way that the liabilities do not become crystallised until the liquidation begins. Well used, Regulation 25 can prevent such a result by permitting provisional recognition of pre-LCD liabilities, which would provide a balance between procedural finality and substantive fairness.

    A targeted amendment to Sections 38 and 40 of the IBC that clearly distinguishes between the existence of a claim rooted in pre-LCD conduct and its quantification occurring post-LCD would be another structurally sound solution like Regulation 25. This strategy is supported by comparative frameworks to accommodate contingent and uncertain liabilities without sacrificing distributional certainty. Rule 14.1 of the UK Insolvency (England and Wales) Rules, 2016 anchors claim admissibility to the origin of the obligation rather than the date of its formal determination. A similar statutory clarification in the IBC would resolve the doctrinal ambiguity at its source, lending legislative backing to what Regulation 25 currently achieves only at the regulatory level.

    CONCLUSION: TO A STILL MORE SENSITIVE DOCTRINE

    Going back, lastly, to the store shop metaphor. One of the customers requested a refund for the defective product; the defect was verified after the shutters were closed. There is no defence of refusal to grant a refund in that case, amounting to refusal to serve in defence of discipline, but on refusal of fairness, as the operative condition, timely ordering, was fulfilled. The insolvency law is faced with a similar dilemma. Where the pre-liquidation conduct results in regulatory, contractual, or statutory proceedings, but does not end until the LCD, the timing of adjudication is usually institutional, as opposed to creditor-driven. The omission of these claims by the reason that they are quantified after LCD raises the distributive accident to the distributive entitlement and deforms the design of the Code.

    The answer is not a very strict exclusion but a moderate inclusion. The claims that are based on the pre-LCD conduct are to be acknowledged as the true financial status of the debtor, despite the fact that the value of the claims has not been resolved yet. The liabilities may rather be within institutional protection, as the structure already takes into consideration. Under Regulation 25, such as estimation, the liquidator is able to value a business at a reasonable amount in the event that quantification is yet to be undertaken. Correctly used, these instruments maintain both finality and equity, such that valid commitments are not killed just due to the fact that their exact worth had made it onto the stage too late in the process.

  • Consolidation Without Safeguards: Analyzing the SEBI FPI Master Circular

    Consolidation Without Safeguards: Analyzing the SEBI FPI Master Circular

    BY KHUSHI JAIN AND UJJWAL GUPTA, SECOND – YEAR STUDENT AT DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW

    INTRODUCTION

    On 5 December 2025, the Securities and Exchange Board of India (‘SEBI’) issued a Consultation Paper on Review of Master Circular for Foreign Portfolio Investors (‘FPIs’) and Designated Depository Participants (‘DDPs’) (‘Consultation Paper’) proposing the consolidation of the existing consultation paper. This paper aims to streamline hitherto fragmented regulations by consolidating multiple circulars and guidelines into a single instrument. Through the Consultation Paper, efforts are made to revise disclosure and compliance for FPIs and DDPs, beneficial ownership norms, compliance obligations and the role of intermediaries.

    This piece first sets out the key changes introduced through the consolidation. Second, the impact of these changes is analysed on various stakeholders including FPIs and DDPs. Third, key concerns arising from the proposed structure are identified. Towards the end, the Indian approach within a comparative cross-jurisdictional regulatory perspective is discussed. The piece is concluded by offering plausible reforms to address the aforementioned concerns so as to preserve efficiency and accountability.

    KEY PROPOSED CHANGES

    The regulations of FPIs are governed by a layered statutory framework under the SEBI Act 1992, SEBI (Foreign Portfolio Investors) Regulations, 2019 (‘2019 Regulations’) and SEBI Master Circulars and Operational Guidelines. The Consultation Paper would reshape the enforceability provisions of FPI regulation.

    Prominently, the Consultation Paper proposes a comprehensive consolidation of multiple circulars, FAQs, and interpretative notes into a single revised Master Circular governing FPIs and DDPs. It operates as de facto subordinate legislation. Building on this, Regulation 4(c) of the 2019 Regulations mandates FPI to disclose beneficial ownership in accordance with the Prevention of Money Laundering Act, 2002 and Financial Action Task Force Recommendations. The Consultation Paper strengthens look-through obligations and identifies natural persons exercising “ownership or control” in a multi-layered investment structure.

    Substantiating on the above provisions, DDPs are provided with registration-related functions and limited ongoing oversight through Regulation 12 of the 2019 Regulations. The Consultation Paper rather shifts their role to frontline regulatory gatekeepers. It inculcates their responsibility for continuous validation of their compliance, enhancing due diligence on FPIs. They are supposed to develop Standard Operating Procedures (‘SOPs’) for validation, real-time monitoring of validation tools such as corporate group repositories, and freeze codes, straining systems under tight timelines like 7-Day Type I change notification.

    This fundamentally extends the disclosure, reporting, and compliance requirements for FPIs by way of more frequent reporting, monitoring and verification of investor information on a continuous basis, and ongoing compliance certification requirements.

    STAKEHOLDER IMPACT ANALYSIS

    There will be asymmetric effects of the proposed changes among the different groups of stakeholders. The changes redistribute regulatory risks and operational burden, having several unintended effects regarding market depth and stability.

    The compliance architecture model can disproportionately affect the passive institutional investors like pension funds and sovereign wealth funds because their investment approach is long-term and non-controlling in essence. Lack of any provision on punitive measures for transitional non-compliance can create considerable legal and commercial uncertainty for market participants. This could result in sudden FPI exits, higher cost of capital for Indian issuers, and higher volatility in the secondary markets, thereby violating Section 11 of the SEBI Act, 1992.

    The Consultation Paper enhances the supervisory authority of SEBI, that could earlier detect concentrated or opaque market positions. However, it also increases institutional dependence on delegated supervision by DDPs, raising coordination and accountability challenges. SEBI may face allegations of inconsistent enforcement or excessive discretion.

    Lastly, the framework may influence volume, composition and stability of foreign capital flows from a market-wide perspective. It relaxes International Financial Services Authority-based FPIs, allowing up to 100% Non-resident Indians/ Overseas Citizens of India/ Resident Indian  participation under strict conditions like pooling, diversification (e.g., no more than 20% in one Indian entity), and independent managers. Foreign institutional investments in the long term may be discouraged due to increased complexities in complying with the debt and equity portions that are expected to be supported by foreign investments. Foreign passive institutional investors may decrease the overall efficiency of the market as a result of less participation in the secondary markets.

    KEY CONCERNS

    Consolidation would result in the conversion of interpretative guidance into mandatory compliance and the expansion of enforceable obligations without any amendment to the 2019 Regulations. It dilutes the effect of delegated legislation principles. Many provisions function as soft law and are not binding rules under Section 30 of the SEBI Act. Thus, the consolidation would make them a binding compliance standard, transforming advisory norms into enforceable duties.

    Moreover, unlike regulations, circulars are not subject to safeguards like legislative scrutiny. Consolidation would thus advance the power of SEBI to alter the compliance structure without any amendment. Consequently, it would also amend the scope of provisions through drafting techniques. Conditional, context-specific, or risk-based obligations are inculcated into general obligations that are to be applicable across the FPI ecosystem. The Consultation Paper could result in omission of caveats and qualifiers. It would broaden the regulatory net without re-examining the substantive framework set out in Regulations 4 and 22 of the 2019 Regulations.

    Furthermore, the Consultation Paper fails to address the doctrine of regulatory equivalence for entities domiciled in jurisdictions that are FATF-compliant. Contradicting the proportionality test, already regulated foreign investors can duplicate and disproportionate disclosure burdens.

    The expansion of the ambit of DDPs leads to regulatory outsourcing. However, it neither ensures any statutory immunity nor delineates liability in erroneous determinations or misclassification of risk. It raises pertinent concerns regarding liability attribution.

    Concerns about constitutional guarantees under Article 19(1)(g) and 19(6) are also raised. Serious concerns about ex post facto interpretation can also exist due to the absence of procedural safeguards of supervisory discretion. It may implicate the principles of audi alteram partem and predictability of the rule of law in financial regulation under the capital regime in India.

    For measures that limit market access, the SEBI Act has laid down a specific procedure to be followed. This includes the requirement that the actions under Section 11B, penal measures under Section 15-I, and suspension or cancellation under Section 12(3) all need a well-reasoned order, prior hearing, adherence to principles of natural justice, and can be challenged in the SAT under Section 15T. As opposed to this, the draft Master Circular for Foreign Portfolio Investors (FPIs) and Designated Depository Participants (DDPs)  (‘Master Circular’) allows trading restrictions via intermediary-led SOPs, without SEBI adjudication, hearing, or an order that can be appealed, and thus sidesteps essential safeguards given in law.

    CROSS-JURISDICTIONAL ANALYSIS

    In the United Kingdom (‘UK’), disclosure or Anti-Money Laundering (‘AML’) failures of foreign investment entities are dealt with by the Financial Conduct Authority through a formal enforcement procedure. Usually, non-compliance leads to supervisory engagement and, if necessary, formal enforcement proceedings initiated by a warning notice. The impacted entities can make representations before an adverse decision is taken against them, and the final decisions are made by the independent Regulatory Decisions Committee. Market access restrictions or licence limitations only arise from a reasoned decision that is subject to appellate review by the upper Tribunal. Unlike as contemplated under the Master Circular, coercive market access restrictions in the UK cannot be imposed by intermediaries and remain exclusively within the Financial Conduct Authority’s (‘FCA’) adjudicatory enforcement process.

    The European Union (‘EU’) framework for portfolio investment compliance operates through MiFID II and anti-money laundering directives. MiFID II does not prescribe automated investor account blocking for Know Your Costumer (‘KYC’) non-compliance; rather, it gives national competent authorities supervisory and investigatory powers, whilst any limitation on market participation must be derived from national law or the trading venue rules. The AML system requires customer due diligence and allows firms to suspend transactions as part of their internal compliance controls. Moreover, when a public authority orders a restriction, the measure is governed by the national procedural law which transposes EU directives and is further guaranteed fundamental procedural safeguards, such as the right to challenge administrative measures before an independent body, and not outsourced to intermediaries.

    In Singapore, the Monetary Authority of Singapore (‘MAS’) supervises AML and disclosure compliance under the Securities and Futures Act through a risk-based supervisory framework. MAS deals with KYC or disclosure breaches by means of supervisory engagement, directions, penalties, or license-related action after the determination of the breach. Automatic trading suspensions or market access suspensions are not usual, and any such coercive restrictions follow well-reasoned decisions to guarantee proportionality and centralised enforcement. Importantly, MAS does not give coercive enforcement powers to market intermediaries, unlike the expanded role that has been considered for DDPs.

    Viewing these jurisdictions collectively, it can be observed that greater transparency and AML compliance can be achieved without having to rely on automated market exclusion mechanisms that bypass prior notice or independent assessment. In this context, the Master Circular delineates a stricter model of regulation than what is necessary, as shown by international practice.

    CONCLUSION AND SUGGESTIONS

    Based on lessons drawn from frameworks discussed above, it is possible that India could prescribe regulatory and procedural safeguards. The following developments can work in tandem for coherent enforcement. 

    Primarily, SEBI should expressly draw a distinction that consolidation of circulars does not transform interpretive guidance or FAQs into binding compliance requirements unless issued under the 2019 Regulations or Section 30 of the SEBI Act. Along with, any provision extending substantive requirements should be brought about only through formal regulatory amendment, following the prescribed legislative safeguards.

    Second, SEBI should desist from retaining conditionality, context-specific qualifiers and risk-based caveats in existing circulars. The Master Circular should operate as an operational guide rather than a source of new general obligations, ensuring that Regulations 4 and 22 of the 2019 Regulations remain the primary substantive framework.

    Third, the consolidated framework must specifically acknowledge the concept of regulatory equivalence applicable to FPIs incorporated in FATF-compliant and well-regulated countries. The requirement of disclosure and KYC must be customized in terms of risks associated with each jurisdiction and type of investor and system significance.

    Fourth, concerning the absence of any measures to shield FPIs from penalties for non-compliance in the transition period, SEBI should provide a definite period for existing FPIs during which non-compliance resulting solely from the newly consolidated obligations shall not be penalised. This will ease both uncertainty and avert sudden market exits.

    Finally, SEBI must clearly define the scope of DDPs’ authority, provide statutory protection for bona fide actions and specify liability allocation in cases of erroneous determinations or misclassification. Coercive or market-access-restrictive decisions should remain exclusively within SEBI’s domain.  Additionally, any restriction on trading, account operations or market access must be preceded by notice, opportunity of hearing, and a reasoned order passed by SEBI under Sections 11B, 12(3), or 15-I of the SEBI Act. Intermediary-led SOPs should not substitute statutory adjudication or appellate remedies under Section 15T.

    The Consultation Paper is veritably an important step towards simplifying the regulation of foreign portfolio investment through consolidation. However, as the authors point out, said consolidation should not weaken statutory protections, proportionality, accountability, or procedural fairness under the SEBI Act and the 2019 Regulations. If there are no adequate safeguards, the draft Master Circular may, in fact, increase the compliance and enforcement burdens and consequences beyond its legal basis. Whether or not this consolidation will ultimately strengthen India’s capital markets depends on the degree of care SEBI exercises in reconciling efficiency and legality in the final framework.

  • Balancing Act: Sebi’s Angel Fund Reforms For Inclusive Startup Growth

    Balancing Act: Sebi’s Angel Fund Reforms For Inclusive Startup Growth

    BY AADIT SHARMA, SECOND – YEAR STUDENT AT DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW

    INTRODUCTION

    India’s startup ecosystem plays a crucial role in economic growth, with angel funds providing essential early-stage investment and mentorship bridging the gap between early seed financing and seed financing. angel investors typically commit between USD 10,000 which can go upto USD 1 million (₹10 lakh to ₹ 8 crore), with greater amounts often provided by syndicates. Despite tighter capital markets and cautious investor sentiment, there were 103 registered angel funds in India holding commitments totalling ₹10,138 crores by Q1 2025. Although early-stage investments declined to approximately $3 billion across 1,500 deals in H1 2025, this sector remains vital for economic development. Recognising this, SEBI introduced reforms via the Alternative Investment Funds (Second Amendment) Regulations and two other circulars in the month of September and October, focusing on revised regulations and relaxed compliance timelines. Key changes introduced include mandating accredited investors, flexible lock-in periods and broadening permissible investments. These reforms aim to modernise angel investing in India.

    However, questions remain whether they will enhance startup funding accessibility or create barriers, especially in underserved regions. This analysis explores the implications of the amendments on the domestic startup funding cycle, offers a comparative analysis with global practices and proposes strategies to improve investment accessibility in India.

    REFRAMING SEBI’S REGULATORY APPROACH TO ANGEL FUNDS

    The 2025 amendments to Securities Exchange Board of India (‘SEBI’)’s Alternative Investment Fund Regulations,2012, (‘AIF’) together with the accompanying circulars, represent a substantive development in the regulatory framework for early-stage investment in India. The regime moves decisively from a primarily prescriptive model to a hybrid approach combining mandatory requirements with enhanced outcome-based flexibility. A pivotal reform is the institution of mandatory investor accreditation  for angel funds, an accredited investor in India is an investor with annual income of Rs. 2 crore or net-worth of Rs. 7.5 crore with 3.5 crore in financial assets, replacing the previous system based solely on financial thresholds.

    This aligns the angel fund framework of India with global regulatory approaches with like that of US SEC Regulation D­ that limits participation on objective accreditation criteria, thereby limiting access to investors who meet specified financial and net-worth thresholds. These investors are presumed to be capable of independently assessing and bearing early-stage investment risk. The minimum investment per portfolio company has been lowered from ₹25 lakh to ₹10 lakh; minimum corpus and commitment thresholds have also been abolished easing fund formation. Notably, changes to the lock-in period will provide greater liquidity, permitting exits within six months in specific cases.

    Angel Funds must now onboard at least five accredited investors before their first close, a measure designed to streamline entry and strengthen fund discipline. The scope of eligible investments has expanded, including Limited Liability Partnerships (‘LLPs’), thereby supporting broader entrepreneurial participation.  Measures such as mandatory investor accreditation, lock-in periods, fund-level investment structures and strict compliance protocols are retained to guard against speculative behaviour. Enhanced transparency is mandated through allocation methodology disclosure in the Private Placement Memorandum (‘PPM’) with additional annual audit requirements for larger funds. The phased compliance timeline reflects SEBI’s intent to balance regulatory rigor with market adaptability. Collectively, these reforms embody SEBI’s model of ‘guided liberalisation’ aiming for a flexible yet robust capital formation environment anchored in transparency and governance.

    STRUCTURAL AND PRACTICAL CONCERNS IN SEBI’S ANGEL FUND REFORMS

    A careful reading of SEBI’s recent circulars indicates that while the reforms appear progressive, they also carry certain structural concerns. The introduction of mandatory accreditation for investors in angel funds, though intended to promote investor protection and align with global practices, may inadvertently restrict the flow of capital by excluding non-accredited investors such as traditional/ legacy angels. This change effectively shifts investment power towards  high-net-worth individuals and institutional syndicates that possess greater organisational structure, compliance capacity and financial depth. Such concentration of investment capacity could lead to capital elitism, gradually marginalising semi-professional angels who, despite lacking formal accreditation, often contribute crucial sectoral knowledge and mentorship to startups. The circular further restricts angel funds from offering units to more than 200 non-accredited investors until September 2026, thereby narrowing the investor pool available to early-stage business ventures and  discouraging investors. Additionally, SEBI’s mandate requiring at least five accredited investors before declaring the first close reverses the conventional practicein angel investing. Traditionally, fund managers identify promising startups first, then attract investors based on those opportunities. The circular imposes the opposite sequence, wherein investors must be secured before any startup is identified, which may slow fund launches, increase opportunity costs and discourage new fund managers. This requirement could also give rise to behavioural distortions where managers bring in passive backers merely to satisfy the regulatory threshold, making compliance formalistic rather than actual. Moreover, regional disparities may intensify as managers outside major hubs such as Bengaluru, Mumbai or Delhi may struggle to attract accredited investors, leading to capital concentration in established business ecosystems.

    Finally, while the reduction in the lock-in period enhances liquidity, it disproportionately benefits institutional syndicates with rapid fund rotation strategies. Thereby placing traditional angel networks whose investment model relies on longer holding periods and sustained founder engagement with the startup at a relative disadvantage as compared to institutional syndicates which are better positioned to benefit from accelerated exit timelines due to their portfolio-based and time bound strategies.

    INTERNATIONAL PARALLELS AND DIVERGENCES

    The statutory framework of the United States (‘U.S.’) and the United Kingdom (‘U.K.)’ have been chosen for comparison as they represent leading common-law jurisdictions with advanced angel investment frameworks that balance investor protection with capital access and whose regulatory models have guided international best practices in early-stage financing and angel investing.

    In the United States early-stage investment is regulated by the US Securities and Exchange Commission,(‘US SEC**’**), particularly Regulation A, Regulation D and Regulation Crowdfunding (‘Reg. CF’). Rule 501 of Regulation D defines an accredited investor, determining eligibility for participation in early-stage investing. Rule 506(b) permits no limit on accredited investors and up to 35 sophisticated non-accredited investors, but prohibits general solicitation, while Rule 506(c) allows general solicitation solely for accredited investors with verified status. Rule 504 limits offerings at $10 million over twelve months and without general solicitation. Regulation A ‘Mini-IPO’ broadens access by allowing non-accredited investors who are subject to investment limits based on income or net worth.

    The 2012 JOBS Act significantly expanded access through Regulation Crowdfunding (‘Reg. CF’) enables startups to solicit investments from non-accredited individuals within statutory caps of a certain income threshold, thereby democratising angel investment and mitigating the concentration of opportunities among only high-net-worth and institutional investors. Reg. CF says that if an investor’s annual income or net worth is below USD107,000 they can invest only a small capped amount in crowd-funding each year. If both are above USD 107,000 they are allowed to invest more but still within a fixed annual limit.

    In the United Kingdom, angel investments fall under the Financial Conduct Authority (‘FCA’) framework, which requires investors to qualify as either high-net-worth or sophisticated investors. The UK distinguishes itself through strong fiscal incentives under the Seed Enterprise Investment Scheme (‘SEIS’) and Enterprise Investment Scheme (‘EIS’), offering income tax relief and loss offset mechanisms to mitigate early-stage risk in investment. Its private placement regime further supports AIFs under controlled conditions, balancing accessibility with investor protection. Viewed against the U.S. and U.K. frameworks, SEBI’s 2025 reforms represent a cautious convergence with global best practices, particularly in investor accreditation, disclosure and governance-led oversight. Similar to the U.S. Regulation D and the UK FCA’s sophisticated investor regime, India’s accreditation model embeds financial competence within regulatory prudence. However, unlike these jurisdictions, India’s approach remains comparatively cautious  lacking fiscal incentives such as the U.K. SEIS/EIS or the participatory openness promoted under the U.S. Reg. CF.

    At national level this cautious approach has been tried to partially offset by recent policy measures aimed at improving the investment climate. The union government announced in the Union Budget 2024 the abolition of  ‘angel tax’ for all classes of investors with effect from the financial year 2025-26, thereby reducing tax-related frictions for early-stage capital formation. In parallel, certain States have introduced sub-national incentives to encourage angel investment. For instance the state of Bihar’s startup policy provides for a ‘success fee’ payable to startups that successfully mobilise investment from registered angel investors. Other states have also adopted broader startup support frameworks through grants, seed funding, incubation support and reimbursement-based incentives, although few have explicitly linked such incentives to angel investment outcomes. These developments suggest that while SEBI’s regulatory architecture remains institutionally cautious, complementary fiscal and state-level interventions are gradually emerging to mitigate the exclusionary effects of accreditation-centric regulation.

    Recent data from the market suggests that the entry level barriers such as mandatory investor accreditation have led to contraction in the angel fund investing. In H2 2025, angel investment rounds dropped nearly 60% to 265 deals, compared with 671 deals a year earlier while funding fell 46% to USD 1.48 billion, from USD 2.73 billion.

    FORWARD OUTLOOK

    The angel funding regime in India comprises diverse investors, including traditional angels and institutional investors with traditional investors more prevalent and institutional ones being at a fast developing stage with a growth of 69% in the last two years, necessitating regulatory frameworks that accommodate their varied investment behaviours, risk tolerances and operational structures. SEBI’s 2025 reforms attempt to align the regime with international practices by enhancing investor protection, transparency and market discipline through mandatory accreditation and flexibility in investment terms. To further optimise these reforms, policy should focus on balancing investor accreditation with inclusivity, incorporating differentiated criteria for underrepresented regions to democratize access to angel funding beyond established business hubs.

    The sharp contraction in angel investment activity observed in H2 2025 highlights the need for dynamic regulatory calibration rather than static compliance thresholds. SEBI could consider a tiered accreditation framework that differentiates between institutional syndicates, experienced legacy angels and first-time investors based on experience, ticket size and risk exposure. In parallel, region-specific pilot relaxations, implemented in coordination with State startup agencies may help address capital access constraints beyond major metropolitan hubs. Periodic post-implementation impact assessments linked to deal flow and regional dispersion would further ensure that investor protection objectives do not inadvertently suppress early-stage capital formation.

    Strengthening capacity-building for emerging angel networks and instituting impact assessments will ensure adaptive and equitable regulation. Additionally introducing fiscal incentives in the tax regime similar to those in the U.K. could incentivize broader participation and retain traditional angels which are important to the startup ecosystem. Though the government scrapped the angel tax and also provides tax exemption under section 54GB of the Income Tax Act, to along with specific relaxations and incentives as introduced by the states, the investors through capital gain exemptions but these exemptions are moderate in nature and limited in scope.  Phased compliance combined with empirical monitoring of fund flows and startup outcomes will support regulatory refinement aligned with India’s diverse entrepreneurial landscape, fostering a resilient and accessible financing environment conducive to innovation a­nd economic growth.

  • Judicial Shift in Treaty Taxation: The Tiger Global Judgment

    Judicial Shift in Treaty Taxation: The Tiger Global Judgment

    BY CHEENAR SHAH, VANSHIKA BANSAL, THIRD- YEAR STUDENT AT GUJARAT NATIONAL LAW UNIVERSITY

    The Supreme Court (‘the Court’) on January 15, 2026, delivered a landmark judgment in the case of The Authority for Advance Rulings (Income Tax) and Others v. Tiger Global International II Holdings (‘Tiger Global case’). The Court determined that the General Anti-Avoidance Rule (‘GAAR’) can supersede treaty benefits and ‘grandfathered’ investments if the exit arrangement lacks any commercial substance. By ruling that a Tax Residency Certificate (‘TRC’) is no longer a conclusive proof of eligibility, the judgement breaks down the classic Mauritius Route and investors must now demonstrate real economic control and management to claim benefits under the India- Mauritius Double Taxation Avoidance Agreement (‘DTAA’).

    BACKGROUND

    Tiger Global invested in Flipkart, Singapore, between October 2011 and April 2015. Flipkart generates a significant part of its revenue through assets in India. In 2018, Tiger Global sold its stake to Walmart Inc. as part of a bigger acquisition of a majority stake in Flipkart.  

    Tiger Global sought to obtain a capital gains tax exemption under Article 13(4) of the DTAA, as it held a valid TRC of Mauritius, and accordingly, filed an application under Section 197 of the Income Tax Act, 1961 (‘IT Act’) to issue a nil withholding tax certificate. However, the Indian tax authorities stated that the exemption cannot be claimed, as Tiger Global lacked independent decision-making control and management.   

    Aggrieved by the decision, the Appellant approached the Authority for Advance Rulings (‘AAR’), which ruled in favour of the Tax Authorities’ decision. However, the decision was overturned by the Delhi High Court on grounds of arbitrariness. The matter was thereafter challenged before the Supreme Court.  

    JUDICIAL PERSPECTIVE

    The Court determined on three major issues: firstly, whether the GAAR could supersede capital gains exemptions under the treaty despite grandfathering of investments made before 2017; secondly, whether the Limitation of Benefits (‘LOB’) provision of the DTAA precluded application of the GAAR; and thirdly, whether the possession of a TRC continued to be appropriate evidence of entitlement to claim relief under the treaty in the post-GAAR regime.  

    The Court deviated from the deferential approach and placed Indian tax adjudication under the post Base Erosion and Profit Shifting (‘BEPS’) international anti-abuse standards that emphasise on the economic substance of a treaty rather than the form. The advantages under the treaties were recharacterized as qualified privileges that depend on commercial presence and control rather than mere residence.

    ANALYSIS

    Why ‘Grandfathering’ is Not a Shield 

    The core of the legal dispute hinges on the interpretation of the GAAR, codified in Chapter XA of the IT Act. Tiger Global argued that their investments were protected by the ‘grandfathering’ provisions of Rule 10U(1)(d), which excludes income from the transfer of investments made before April 1, 2017. They contended that since their shares were acquired between 2011 and 2015, the gains were immune from GAAR scrutiny. Nevertheless, the Court took a more sophisticated mode of analysis and made a distinction between an investment and an arrangement. While the investment occurred prior to the cut-off date, the arrangement of the specific share-sale transaction took place in 2018. The result of Rule 10U (2) is that the provisions of GAAR will apply to an arrangement regardless of the date of its entering into, provided the tax benefit will be obtained on or after April 1, 2017. 

    This points to the fact that grandfathering is not an anti-tax avoidance license. In case the Revenue can show that an arrangement does not have commercial substance or the arrangement was entered into with a major purpose of receiving a tax benefit, then the age of the original investment will not rescue the arrangement as an impermissible avoidance arrangement. Over the years, international investment has been flowing into India, thinking that any old investments were not subject to modern anti-avoidance regimes through grandfathering. The Court, however, found that GAAR could be used in relation to exits that could be regarded as impermissible avoidance arrangements under Section 96 of the IT Act.  

    Such a jurisprudential change will presumably require the re-pricing of Indian assets, with investors now having to add a treaty risk premium to the assets to reflect latent capital gains liabilities. This shift also demonstrates that domestic anti-abuse provisions have become more prevalent than treaty concessions. Additionally, the ruling exposes prevailing offshore investments to the risk of long litigation. The onus of proof has changed, and when the Revenue proves a prima facie case that the investor is engaged in tax avoidance, it is incumbent upon the latter to prove that the motive was genuine. Tax neutrality in this new environment cannot be considered an unchanging part of an investment strategy. 

    The Coexistence of SAAR and GAAR 

    The DTAA 2016 Protocol added a LOB provision that specifically targets so-called shell or conduit companies. This clause provides a quantitative threshold where a company is not considered a shell if its total expenditure on operations in Mauritius is at least 1.5 million Mauritian Rupees. Tiger Global argued that because they satisfied these objective LOB criteria, the Revenue was precluded from invoking GAAR. 

    This either-or analysis was opposed by the Court, and it was held that Specific Anti-Abuse Rules (‘SAAR’), like the LOB clause, and GAAR can and do coexist. LOB clause is a transitional objective filter, but GAAR is a supervening subjective code that is meant to address aggressive tax planning. It may also be disqualified under GAAR, even when an entity meets the spending requirements of the LOB, the primary purpose of the arrangement being to claim a tax benefit. 

    This change has far-reaching consequences for international tax planning. Through its focus on the main purpose of the test, the Court has indicated that even transactions which technically meet all the requirements of SAAR may be disqualified in case their purpose is mainly tax-oriented. This causes a shift of emphasis from box-ticking compliance to the creation and documentation of an effective, authentic business point behind each tier of an investment structure. 

    Substance over Form and Piercing of the Corporate Veil 

    Further, the Court emphasised on the reality of the corporate structure under the tax system in India rather than the formal adherence to the treaty. The legislative effect of the Central Board of Direct Taxes (‘CBDT’) Circular No. 789 of 2000, which considered a TRC as adequate evidence of residence to claim benefits, was further emphasized in Union of India v. Azadi Bachao Andolan. However, the present case recalibrates on that jurisprudence in the light of the contemporary legislative framework and limits its application. The court affirmed that the circulars are binding on the tax authorities, but it is important to note that they are supposed to be applied within the legal environment in which they are issued. The amendments implemented by the Finance Act, 2012, Chapter X-A GAAR incorporation, and changes to Rule 10U have essentially changed this situation by mandating an evaluation of effective control and management. Therefore, the Court ruled that though a TRC is a requirement, it is not a conclusive requirement under Section 90(4) of the IT Act. 

    Additionally, the doctrine of substance over form as applied in the case of McDowell and Co. Ltd. v. Commercial Tax Officer was referred to emphasize that colourable instruments that aim to evade tax cannot be justified as tax planning and that cross-border structure should be evaluated based on the actual economic nature of the arrangement and not the legal structure. 

    The Court affirmed the findings of the AAR and approved functional piercing of the corporate veil, observing that the real control and power of decision-making of Tiger Global was not in Mauritius, but in the United States. The use of the ‘Head and ‘Brain’ test,  along with the Place of Effective Management described the Mauritian entities as a see-through structure, which did not have an independent existence. This decision, therefore, confirms that real commercial substance is required of treaty benefits and tax authorities are permitted to ignore intervening corporate levels where control is evidently exercised in other areas. 

    CONCLUSION

    The case of Tiger Global is an important judgment that indicates India’s attitude towards how the advantages of the tax treaty can be construed concerning the cross-country corporate arrangements. The Court not only simplified confusion about the India- Mauritius DTAA but also suggested a gradual change in the attitude to rely only on the formal treaty residence to the tactical review of the investment and control structure of the corporate management. It demands a change in the box-ticking compliance to ex-ante accounting of the presence of a strong commercial justification. In addition, the Court has distinguished investments and arrangements, which means that the exit structuring will now be evaluated irrespective of the entry date; even the grandfathered investments made before April 2017 will be taxed according to GAAR when the exit arrangement is defined as a tax avoidance measure. Thus, PE/VC frameworks must clarify their geography of control and verify expenditure limitations as per the LOB provision.

  • Bridging the Gap in Indian Group Insolvency: Integrating Planning Proceedings

    Bridging the Gap in Indian Group Insolvency: Integrating Planning Proceedings

    BY KRITI MEHTA, THIRD- YEAR STUDENT AT NIRMA UNIVERSITY, AHMEDABAD

    INTRODCUTION

    The world has witnessed the prevalence of enterprise groups with the advent of globalisation and market integration. Particularly in India, as of March 2020, companies which are listed in the NIFTY 50 Index reported having an average of 50 subsidiaries. Despite restrictions by the Ministry of Corporate Affairs on subsidiary layers, complex corporate structures persist, creating challenges like operational linkages, group disintegration, and loss of synergies. In the absence of a comprehensive framework for resolution, it results in reduced value of the asset, inefficient treatment of creditors of solvent entities within the enterprises, prolonged delays, among others. Therefore, a holistic framework for group insolvency becomes pertinent to prevent inconsistent adjudication and erosion of collective enterprise value.

    Firstly, the blog evaluates the pre-existing international approaches to group insolvency and examines the legislative response of the UK to the same. Secondly, the blog argues that India’s current insolvency framework is inadequate for group insolvency and adopting the procedure for planning proceedings as proposed in the United Nations Commission on International Trade Law (‘UNCITRAL’) will enable coordinated restructuring. Against this backdrop, it is imperative to acknowledge that the present discussion is confined to the domestic dimension of group insolvency only

    INTERNATIONAL FRAMEWORK ON GROUP INSOLVENCY  

    Internationally, two remedies address complexities arising in group insolvency. These are procedural coordination and substantive consolidation.  Procedural coordination preserves the principle of separate legal existence as laid down in Salomon v. Salomon. Additionally, it also streamlines procedural elements like the filing of cases, timelines of submissions, and coordination among key stakeholders like insolvency professionals and creditors. Conversely, substantive consolidation dispenses with the legal principle of separate legal entity by pooling all the assets and liabilities of the entities for insolvency resolution. This approach leads to the equitable treatment of creditors, particularly where the management of corporate entities is intertwined and meaningful disentanglement is not probable.

    However, this approach has drawn significant criticism from scholars worldwide as it undermines corporate autonomy. These companies have separate legal existence, but they are a single economic unit; therefore, the court has to lift the corporate veil and give precedence to the single economic entity principle. Consequently, its application is an exceptional remedy, invoked only when a separate legal existence will frustrate the principle of equitable distribution during resolution. While these approaches are developed in other jurisdictions, their legal adoption in India remains limited, necessitating judicial innovation. In the Indian insolvency regime, the doctrine of a separate legal entity is deeply rooted. This necessitates the adoption of procedural coordination between the corporate entities, since the substantive coordination will lead to pooling of assets and liabilities. This undermines the principle of separate legal existence. Thereby, procedural co-ordination aligns with the Indian jurisprudential analysis without unsettling the settled doctrines of separate legal existence and single economic entity principle.

    LEGAL FRAMEWORK IN INDIA

    The Insolvency and Bankruptcy Code, 2016 (‘IBC’), lacks a legal framework governing group insolvency. Judicial interpretation has played a pertinent role in filling the legislative vacuum. In Embassy Property Developments Private Ltd v. State of Karnataka, the Court acknowledged the jurisdiction of the National Company Law Tribunal (‘NCLT’) to consolidate insolvency proceedings of entities that form part of the same corporate group under 60(5)(c) of IBC, 2016. Further, in State Bank of India v. Videocon Industries, the NCLT Mumbai bench evolved the twin test to determine the necessity of consolidation. The test examined certain ingredients, viz, common control, common liabilities, pooling of resources, interlacing of finance, intricate link of subsidiaries, singleness of economic units, and common pooling of resources. The court underscored that consolidation should be denied only if it is prejudicial to the stakeholders or violates the objectives of the code.

    The judiciary further shed light on the operational difficulties inherent in the group insolvency process through the Jet Airways case. The Apex court highlighted operational challenges in group insolvency, including intertwined assets and liabilities among the entities, a lack of coordination between authorities and the resolution professional (‘RP’), which leads to procedural delays. While the ad hoc measures are employed by the adjudicating authorities, the absence of codification impedes the successful resolution of group insolvency proceedings.

    Recognising these challenges, the 2025 Insolvency and Bankruptcy Code (Amendment) Bill 2025 (‘Bill’) attempted to introduce a robust framework for group insolvency by including Chapter V-A. However, these efforts are not immune to criticism as the Bill does not incorporate planning proceedings, as introduced by the UNCITRAL on Enterprise Group Insolvency (‘MLEGI’) under section 2(g).

    GROUP INSOLVENCY AND PLANNING PROCEEDINGS

    Planning proceedings are a specialised process under group insolvency resolution designed to develop a combined plan for restructuring or liquidation. This concept of planning proceeding is envisaged under MLEGI. Under Article 2(g), for proceedings to qualify as a planning proceeding in a domestic dispute, two conditions must be satisfied:

    1. The proceedings must involve the participation of more than one group member for implementing the group insolvency solution; and
    2. A group representative must be appointed, who will facilitate coordination among the group members.

    This indicates that the planning proceeding is an insolvency proceeding of one of the group members in which one or more groups of the enterprise voluntarily participate. A group insolvency solution is the objective of these proceedings. It may pertain to the reorganisation, sale or liquidation of assets or operations of the companies to protect and enhance the combined value of the group.

    The distinction between planning and the main group insolvency proceeding is conceptual as well as functional. A main group insolvency proceeding is initiated in the jurisdiction where the debtor has its Centre of Main Interest, and its scope is confined to the default of a corporate debtor only. Under the Indian insolvency regime, there is no parallel regulatory framework like Article 2(g) of MLEGI that addresses procedural coordination during insolvency. Recently, through judicial intervention, there have been group insolvency proceedings, but the efforts remain constrained.

    ANALYSIS

    Under the Indian insolvency regime, the rigid distinction between the parent and the subsidiaries, coupled with the exclusion of the related entities from participation in the insolvency process, undermines the revival of the corporate debtor. Through the incorporation of planning proceedings within the domestic framework, the insolvency process can become more proficient. Such coordination facilitates the revival of the CD owing to the efficient management of the assets between subsidiaries and the parent company.

    In contrast to the Indian framework,  planning proceedings operate as a coordinated framework which envisages the restructuring of the multiple entities in the enterprise group. The court is authorised to approve inter-company financing, stay of actions or central administrative actions within a group. This preserves the going concern value of the insolvent entities, and also curbs the domino effect of structural and functional complications post-insolvency on the related entities of the group.

    The model law states that planning proceedings generally warrant the participation of related solvent entities through the appointment of a single RP that serves multiple affiliates, and ensures better coordination and long-term profit. This is in contrast to existing Indian insolvency framework, which restricts participation to insolvent entities only, foreclosing the possibility of contribution of resources for a collective recovery. The adoption of planning proceedings offers several potential benefits for the domestic insolvency framework.  The Insolvency and Bankruptcy Board of India working group observed that the separate insolvency of the group enterprise reduces credit value. The consolidation of multiple Corporate Insolvency Resolution Processes (‘CIRP’) into one planning proceeding leads to maximisation of assets, reduction in duplication, prevents conflicting resolutions and leads to better coordination. It also incentivises stakeholders, like the creditors, to lend more finance as they can file inter-company claims.The planning model would therefore mitigate the domino effect of the group distress.

    Hence, the Indian legislature may warrant examination of a tailored framework by defining planning proceedings within the domestic insolvency framework, consistent with Indian standards. The authorities must avoid verbatim adoption of the model law as evidenced by the conundrum of interpretive debates on Section 34, Arbitration and Conciliation Act 1996, that arose during Gayatry Balwaswamy’s judgment.

    To incorporate domestic needs, the law must also authorise the NCLT to grant relief under the planning proceeding. The legislature may take reference to MLEGI, Article 26, which requires separate approval from a member of the CoC. Any plan approved under the planning proceeding should be binding on all the participants, upon sanction by the NCLT. When the international model law is calibrated to align with domestic needs, it will lead to better adjudication, coordinated restructuring, and the prevention of value erosion from fragmented proceedings.

    PLANNING PROCEEDINGS IN THE UK

    The United Kingdom is among the few jurisdictions which actively implemented MLEGI, particularly planning proceedings. The proposed framework authorises a group representative to seek relief, for instance, injunctions, stays on the order, etc, to protect the value of the group. Pertinently, the framework allows participation of foreign creditors without necessitating parallel proceedings.  The applicable law for creditors will be the one that would have applied if the insolvency proceedings had been commenced. The UK also considered examining the interaction between MLEGI and 26A of the (UK) Companies Act 2006, which provides for restructuring plans. The government remarks that despite the broad definition of planning, the model did not incorporate restructuring plans, which may be pertinent for the successful implementation.

    Notwithstanding the proactive stance, the proposed implementation by the UK parliament reflects anomalies. A primary concern arises under Article 5 of MLEGI, which mandates the designation of a competent authority. Although the UK consultation suggested that an accountant in bankruptcy could potentially act as an authority, they have clarified that they don’t intend to create new institutional bodies. Hence, it is ambiguous which institution or court will be entrusted with the statutory function under Article 5. This institutional indeterminacy has direct repercussions on the creditor treatment, as fragmented adjudicatory treatment creates divergent approaches that undermine the efficiency of the proposed law. While the model law leaves it to the domestic court to manage the conflict, there have been no guidelines from the appropriate authority.

    CONCLUSION

    The growing pertinence of group insolvency has exposed the limitations of the IBC in addressing the challenges to financial distress. Judicial interventions have tried to fill the vacuum, with little success owing to the problems of value erosion and loss of operational synergies, among others. In this context, the MLEGI provides a unique solution through the introduction of planning proceedings. It preserves the dominant legal principle of separate legal existence while also facilitating collective restructuring without adopting substantive consolidation. Therefore, it necessitates the statutory introduction of planning proceedings with tailored domestic safeguards. Additionally, the appellate court should be empowered to grant interim reliefs including appointing a group representative, to ensure information symmetry across group entities. A calibrated implementation of the planning process will enhance value maximisation and strengthen creditors’ confidence in the Indian insolvency regime.

  • Tick-Box to Truth – SEBI’s 2025 Clarifications and the Crisis of Director Autonomy

    Tick-Box to Truth – SEBI’s 2025 Clarifications and the Crisis of Director Autonomy

    BY HARSHITA DHINWA AND RAM SUNDAR SINGH AKELA, FOURTH- YEAR STUDENTS AT NUSRL, RANCHI

    INTRODUCTION

    The first six months of 2025 saw a historic culling of Independent Directors from Corporate boardrooms in India where more than 150 Independent directors voluntarily resigned from numerous listed companies, not in anticipation to join new ventures but as an ultimate defense against the unprecedented growth in regulatory scrutiny and personal liability. The prime mover in this instance is the Securities and Exchange Board of India’s (‘SEBI’) 2025 clarificatory note on “Material pecuniary relationship” with securities under Regulation 16(1)(b)(iv) of the Listing Obligations and Disclosure Requirements (‘LODR’) Regulations 2015. However, a deeper look into the high-profile cases such as InfoBeans Technologies 2025, Byju’s 2024-25, Paytm Payments Bank 2024, Dewan Housing Finance Corporation Limited 2021-23, and Punjab and Maharashtra Co-operative PMC Bank 2019 -20 show a systemic connection where in all of them, the directors identified promoter domination, limited information about the financial data, and the threat of retrospective legal action as the main drivers. The main motive is to strengthen such governance by rewiring what the concept of independence means, to go beyond formal financial bright-lines to examine the relative economic and social frameworks that CEOs and nominal IDs should be freed from.

    SEBI’S 2025 CLARIFICATIONS: A SHIFT IN STANDARD OF INDEPENDENCE

    SEBI’s informal guidance to InfoBeans Technologies on May 14. 2025, clarifying “material pecuniary relationship” under  Regulation 16(1)(b)(iv) of the LODR Regulations left a big shift in independent directorships as a mere formula compliance to its substantive decision-making by independent directors, which saw a significant shift from size and revenue-based materiality assessment.

    Historically, Section 149(6) of the Companies Act, 2013, defined independence with the help of a quantifiable limit where pecuniary transactions not exceeding 10% of a director’s total income over two preceding final years would be considered independent.  SEBI’s clarification introduced a more wholesome evaluation of ongoing relationship, indirect economic ties and potential biasness to judgment, without numerical limits. Through InfoBeans, SEBI evaluated an Independent Director’s (‘ID’) proposed consultancy with an overseas subsidiary, compensated with 10% of their income, noting that materiality under LODR lacks a fixed ceiling, urging boards and Nomination and Remuneration Committee (NRC’s) to prioritize substance over form in its assessment of independence.

    This aligns with the Ministry of Corporate Affairs’ (‘MCA’) General Circular No. 14/2014, which excluded sitting fees and reimbursement from assessment of pecuniary relationship while focusing on autonomy. Moreover, the J.J. Irani Committee Report (2005) recommended assessing materiality from the director’s or Recipient’s perspective, proposing a 10% income threshold for transactions, that is, the key consideration will be whether the scale of financial involvement is substantial enough to compromise the director’s involvement. According to ICAI’s “Technical Guide on the Provision of Independent Directors from Corporate Governance Perspective, 2021”, the method of fiscal compilation should be disregarded, while also citing MCA’s October MCA’s 2018 Offences Committee Report recommended a 20% cap (Excluding sitting fees) to curb the erosion of directors’ discretionary powers and to standardize the governance framework. Due Diligence Norms demand prime disclosures and retrospective inspections on “friendly” directors to prioritize independent directors’ bias-free judgements over formally induced compliance. This change challenges the board to rethink their appointment and oversight role, ensuring that IDs are free from any social and economic influence.

    THE MASS DEPARTURE: CRISIS DISGUISED AS COMPLIANCE

    SEBI’s clarification has nearly provoked a boardroom Exodus, with almost 549 IDs resigning in FY25, of which, 94% mid-term, most of which were serving on National Stock Exchange  comparable to 2019’s wave, where 1390+ IDs quit. Resignation is more seen in firms facing financial distress, regulatory sanction, or governance lapses, and where ID’s report promoter-driven opacity, restricted access to financial data and fear of personal liability is rampant. For instance, the IDs of Byju’s resigned stating promoter-controlled decision-making and lack of financial transparency, as reported in MCA filings. Paytm’s directors exited fearing personal liability when the Reserve bank of India imposed penalties for non-compliance, while PMC Bank’s directors were investigated for failing to detect loan irregularities. The IL&FS crisis, where IDs were liable for oversight failures despite limited access to information, sets a precedent. Further, a 2025 NSE report noted a 30% resignation spike post-clarification, showing a crisis masked as compliance. The InfoBeans guidance multiplied fears of retrospective liability, as SEBI’s overall scrutiny exposed IDs to risk for past decisions, even beyond what they have in control.

    This “regulated retreat” arises from an inherent imbalance in structure where IDs face fiduciary and criminal liability under Section 149(8) of the Companies Act and SEBI’s review of regulatory provisions related to independent directors, but lack veto power, access to audit reports, or whistleblower protections. Unlike the system governing the U.S., where the Business Judgment Rule shields diligent directors, India’s framework leaves IDs in a much vulnerable position. It has been seen that IDs were penalized in  SAHARA India v. SEBI for promoter-driven judgments despite restricted authority. The legality was defeated in Chanda Kochhar V. SEBI, where IDs were examined for endorsing inequitable loans exposed under Section 149 as parental predominance over promoters. ID Nusli Wadia, who was revealed in the Tata-Mistry saga, also exposed parental superiority. This appears in the MCA’s 2018 Offences Committee Report, pointing ID liability concerns as one of the motives for quitting, which requests increased safeguarding of Section 149. The absence of being able to manage this risk without authority is what, in fact, leads good directors to quit high-risk companies, which in turn triggers the need for our IDs to be upgraded seamlessly, plus for the governance to re-establish its integrity

    THE PAPER-THIN PROMISE OF INDEPENDENCE

    Section 149(6) of the Companies Act, 2013, and Regulation 16 of LODR, create a mirage of independence by prioritizing formal disqualifications such as past financial ties, shareholding, or employment over functional autonomy.  In promoter-dominated firms, constituting 60% of listed entities, IDs are often selected by promoters, undermining their primary role as stakeholder guardians. The Kotak Committee Report (2017) criticized NRCs for acting as rubber stamps, failing to rigorously vet independence as evidenced in Dish TV India Ltd. (2021 BSE Filing), where minority shareholders challenged ID appointments for lacking autonomy and exposing promoter overreach. Similarly, in N. Narayan v. SEBI, IDs were penalized for governance lapses without direct involvement, highlighting judicial overreach that generally disregards Section 149(12)’s liability limits.

    The absence of the safe harbor Doctrine and the Delaware–style “entire fairness” test, which protects directors by scrutinizing conflicted transactions, worsens the ID exodus. Originally a creature of U.S. corporate law, the Safe Harbor Doctrine protects directors from liability arising out of decisions made in good faith, with due care and in the best interests of its company, even though outcomes can come out adverse. In the state of Delaware, the theory is codified in the “Business Judgment rule” which presumes director are diligent unless proven otherwise. This sharply contrasts with Section 149(12), which limits ID liability to act with knowledge or consent, but is inconsistently enforced as seen in the Narayan v. SEBI case.

    In addition, the U.K.’s Stewardship Code, issued by the Financial Reporting Council, mandates BODs and institutional investors to prioritize long-term value, transparency, and stakeholder interests, and requires annual disclosure of voting policies and dissent. Principle 7 emphasizes board independence, urging directors to challenge management constructively. In Royal Dutch Shell plc, the Code’s application compelled directors to disclose climate-related governance decisions, thereby enhancing accountability. India’s Regulation 25 mandates separate ID meetings, but these lack the Code’s rigor, as seen in the case study of Yes Bankfiasco , where IDs failed to curb risky lending due to promoter dominance and limited collective action.

    REIMAGINING INDEPENDENCE – A BLUEPRINT FOR REFORMS

    Halting the departure and regaining trust requires the implementation of reforms in India’s corporate governance. Firstly, since promoter dominance affects 60% of listed companies, it must be controlled by mandating independent third-party nomination panels as proposed per CII . These Panels will compromise minority shareholders, institutional investors and industry experts ensuring that ID appointments are based on expertise and autonomy. Secondly, in addition to the self-declaration under Section 149, promoters should explicitly state whether they have any prior economic, social, or historical relationships with ID candidates, either professionally or financially. This will be supported financially by NRCs and audited by external auditors, thus maintaining transparency and individual choice, preventing such promoter-led appointments. Thirdly, the implementation of the safe harbor doctrine for IDs who are on-record documents of dissent in board minutes. SEBI has recommended this in its consultation paper on directors’ protections, reducing the threat of multiple resignations due to IDS fearing punishment for not protecting the company.

     Fourth, flexibility and competitiveness in remuneration: SEBI in 2019 proposed capped stock options needing both shareholder and minority approval. Here, remuneration is competitive with attracting high-caliber talent but that does not compromise their independence. By the 2018 Report for MCA unlike high fees, which consider sitting fees insufficient, this alignment’s alternative ID incentives with the businessman’s interests; therefore, they should be retained. Fifthly, regular training on finance, risk, and compliance should be guaranteed and Formal evaluations of ID performance should be conducted. Sixthly, using Regulation 25 separate ID meetings to arrange red flags and Section 150’s databank and expertise tests for experienced IDs should be streamlined; these reforms would make ids empowered overseers, not ornamental figures.

    CONCLUSION

    Independence now feels like  escape, not strength. What was obtained to construct what SEBI 2025 will build has instead exposed the unwillingness of our setup to deny real power but equally demand responsibility. The interpretation of “material pecuniary relationship” under Section 149(6) (c) of the Companies Act and Regulation 16(1)(b)(iv) of SEBI’s LODR Regulations, certainly post-SEBI’s InfoBeans guidance, shows a stark shift from tick-the-box to substance. Independence can be assessed not just on paper but equally in spirit, making it free from past ties, undue influence or hidden loyalties. Independence must be both real and visible for effective governance.

    To stem the prevalent exodus of IDs and reinstate confidence in corporate governance, Section 149(6), (12) of the Companies Act, and Regulations 16 and 25 of LODR should be amended to include a safe harbour doctrine for the protection of dissenting IDs, a guarantee for full access to audit data & whistleblower protection, and independent nomination panels without influence of promoters. Remuneration should be fixed with independence safeguards to balance autonomy and talent attraction in the industry, and a materiality threshold should be codified to ascertain pecuniary relationships.  These amendments will ensure independence, substantive rather than symbolic, and they will strengthen integrity in corporate governance.

  • From Price Control to Market Discipline: Reading SEBI’s Base Expense Ratio Reform in Comparative Perspective

    From Price Control to Market Discipline: Reading SEBI’s Base Expense Ratio Reform in Comparative Perspective

    BY AADIT SHARMA, SECOND YEAR STUDENT AT RMLNLU, LUCKNOW

    INTRODUCTION

    India’s mutual fund industry has experienced accelerated growth with assets under management increasing from ₹72.2 lakh crores in May 2025 to ₹80.8 lakh crores by November 2025 with retail investors having a larger chunk in the market. It is in this context of rapid market expansion and retail involvement that the Securities and Exchange Board of India’s (‘SEBI’) circular dated 17 December 2025(‘Circular’) introducing the Base Expense Ratio (‘BER’) has been primarily discussed as a numerical or transparency-driven intervention. The earlier Total Expense Ratio (‘TER’) was a single, all-inclusive umbrella cap that bundled together the fund’s core management fees, distributor commissions and operating costs along with various statutory and regulatory levies (such as GST, STT, Stamp Duty and SEBI fees) into one consolidated percentage. The now introduced BER includes unbundling of costs. It states that the BER will only include the base core scheme-level expenses such as management fees, distribution costs and routine administration, while statutory and regulatory levies are excluded and charged separately on actuals. 

    This article argues that the BER framework reflects a measured shift by SEBI from merit-based price control towards disclosure-led market discipline, while consciously stopping short of full deregulation. When viewed in a comparative international context, the reform reflects a cautious alignment with global regulatory trends rather than a blind replication of foreign models.

    FROM BUNDLED CONTROL TO SELECTIVE TRANSPARENCY

    Prior to the circular, mutual fund expenses in India were regulated under a TER framework that bundled discretionary fund management fees with statutory and regulatory levies such as GST, Securities Transaction Tax, exchange fees, and SEBI charges. Although nominally framed as a disclosure-based ceiling, the TER regime functioned substantively as merit regulation because SEBI did not merely mandate disclosure of costs but prescribed binding ceilings on total expenses regulated under SEBI (Mutual Funds) Regulations, 1996. By prescribing category-wise caps on the aggregate chargeable expense, SEBI effectively determined what constituted a ‘reasonable’ cost structure for mutual funds, embedding its regulatory judgement directly into cost limits. Investor protection under this framework was achieved less through competitive pricing or informed choice and more through ex ante regulatory intervention. Even where SEBI permitted limited add-ons such as the additional allowance of up to 0.05 basis points in specified circumstances, including exit load–linked expenses, the underlying architecture remained one of bundled cost control, with statutory pass-through levies obscuring the true pricing of fund management services.

    The BER reform marks a deliberate reconfiguration of this approach. By separating core fund management costs from statutory and regulatory levies, now charged on actuals, SEBI has partially withdrawn from adjudicating the fairness of total expenses. Instead, it has enabled investors to evaluate the pricing of asset management services independently of compulsory charges. This shift represents a recalibration rather than an abandonment of regulatory control: while aggregate cost assessment is displaced in favor of transparency and comparability, SEBI has consciously retained category-wise caps on the base component. This reflects continued skepticism about the disciplining capacity of markets in a retail-dominated ecosystem. However, the reform is not without structural consequences. Although statutory levies are excluded for all funds under the BER framework, the practical benefits of this change are not evenly distributed. Large Asset Management Companies (AMCs)which typically operate close to the regulatory TER ceiling benefit from the removal of mandatory levies such as GST and transaction-related taxes from the capped expense head, as this reclassification restores usable pricing space and cushions margin pressure without requiring any adjustment to headline fees. Smaller AMCs, by contrast, generally price their schemes below regulatory caps and therefore derive limited incremental flexibility from the reform. While the BER framework advances transparency, but does not significantly change competitive conditions, as its practical benefits accrue mainly to AMCs constrained by existing expense ceilings. This outcome underscores the limits of disclosure-led governance in addressing distributive and competitive asymmetries that were previously moderated through aggregate cost controls.

    COMPARATIVE PERSPECTIVE: CONVERGENCE AND DELIBERATE DIVERGENCE

    A.    United States: Disclosure Without Price Ceilings

    In the United States (‘US’) mutual fund regulation is   administered by the Securities and Exchange Commission (‘SEC’) under the Investment Company Act of 1940. It is premised on a combination of disclosure, investor education and procedural safeguards rather than direct regulation of fee levels. The SEC does not impose ceilings on expense ratios; instead funds are required to disclose management fees, distribution expenses (including 12b-1 fees) and operating costs in standardized formats leaving pricing discipline to investor choice and competitive pressures. The SEC requires that mutual funds disclose the expense ratios in key documents such as the prospectus and shareholder reports enabling investors to compare costs across funds.

    By contrast SEBI’s BER framework reflects a more cautious regulatory stance. Although disclosure has been strengthened through cost unbundling, SEBI has retained category-wise caps on base expenses, signaling an institutional judgement that disclosure alone may be insufficient to discipline pricing in a predominantly retail market.

    B. European Union: Transparency with Behavioral Framing

    The European Union’s (‘EU’) regulatory framework particularly under the Packaged retail and insurance-based investment products (PRIIPs), places strong emphasis on cost transparency through mandatory Key Information Documents . The EU regulatory framework is premised on the view that disclosure is effective only when it can be readily understood by retail investors. Accordingly, the PRIIPs regime requires investment costs to be presented in standardized formats and in many instances to be expressed in monetary terms over defined holding periods rather than only as percentages. This approach reflects an explicit regulatory acknowledgement that purely numerical disclosures may not be sufficient to inform investors in decision-making.

    SEBI’s BER framework aligns with the EU’s approach in unbundling costs and enhancing comparability across schemes but differs in its method of disclosure. While the Indian framework improves numerical transparency by separating base expenses from statutory levies it does not mandate behavioral framing or investor-oriented presentation of costs.  The reform enhances visibility of pricing components  but stops short of shaping how investors interpret or process that information.

    Taken together, these comparisons indicate that SEBI’s reform represents hybrid regulatory design. It borrows transparency mechanisms from global best practices while retaining structural controls suited to domestic conditions. The result is neither full convergence with them nor resistance to them but selective adaptation.

     THE LIMITS OF DISCLOSURE AS INVESTOR PROTECTION

    Disclosure-based regulation rests on the assumption that investors are able to read, understand and meaningfully compare cost information across financial products. In practice, this assumption is unevenly satisfied in India’s predominantly  retail driven mutual fund market. Levels of  low financial literacy are entangled with perceived complexity and limited information on investors’ part. As a result, the investors rely on intermediaries, brand reputation or recent returns rather than cost metrics when making investment decisions. In this context, the BER framework may improve the visibility of expense components without necessarily altering investor behavior. While headline base expense figures are now easier to identify, investors may underappreciate the cumulative impact of statutory levies charged separately or may continue to prioritize short-term performance over cost efficiency. As a result, transparency may not translate into effective market discipline. This does not undermine the regulatory rationale of the BER reform, but it highlights an inherent limitation: disclosure can function as a meaningful tool of investor protection only where investors possess the capacity and incentives to use the information disclosed.

    CONCLUSION: MAKING TRANSPARENCY EFFECTIVE

    The introduction of the BER marks a recalibration of mutual fund regulation rather than a completed transition. By unbundling statutory levies from core scheme expenses SEBI has created the conditions for improved cost comparison but transparency alone will not ensure market discipline unless it is operationalized through complementary regulatory practices.

    To realise the BER framework’s potential, post-implementation monitoring must assume central importance. SEBI should systematically track how expense structures evolve under the new regime and whether cost efficiencies are passed on to investors or absorbed within margins and distribution incentives. Periodic, category-wise publication of BER trends could strengthen competitive pressure without additional rulemaking.

    The impact of disclosure also depends on how intermediaries operate. In a market dominated by retail investors, transparency at the scheme level will have limited effect if distributors continue to shape investment decisions without regard to costs. Unless distributor incentives and point-of-sale disclosures reflect BER-related cost differences, investors are unlikely to use this information in practice. In addition, small improvements in how costs are presented such as showing base expenses alongside statutory levies can help investors better understand the total cost of investing, even without introducing formal behavioral mandates.

    Read this way the BER reform is best understood as a foundational step. Its success will depend less on arithmetic recalibration and more on whether transparency is translated into sustained pricing discipline through monitoring, intermediary oversight and usable disclosure.